Can India Overtake China in GDP & FDI ?
March 21st, 2007 - by Chris Devonshire-EllisThe assertive question on the streets in Bombay and Delhi is not just a question of “if” - it’s a question of “when”. From the outsider, and especially from China, it may seem a rather optimistic comment, and for sure, one of the endearing traits of the Indian population is their exquisite optimism. Garnered with rapid mood swings however, it can range from the breast beating machismo posturing of “Our boys will win the Cricket World Cup !” (currently being played in the West Indies) to depair upon defeat (against Bangladesh) to more upbeat optimism again upon a record win against lowly Bermuda. So, it’s to be expected that Indian statements of an upbeat nature can be taken with a pinch of curry powder.
However, there is more to the theory of India overtaking China’s FDI and GDP figures than mere posturing. I’ve heard many stories and anecdotes about the reasons why and why not, but two essential truisms come into play to determine the actual outcome. The reality being that yes, under certain circumstances, India can overtake China’s position in global economics. These are the two big issues:
Democracy vs One Party State
It looks like China won this - the Chinese state with no opposition just getting things done, while India is mired in democracy. However I’m not convinced the race is over. Rather like the hare and the tortoise, for sure China’s hare has disappeared over the horizon. It’s FDI is ten times that of Indias. But can China sustain a one-party system ? Here’s the conundrum - with that massive population - if China doesn’t keep everyone busy and sharing in the nations new wealth, problems can occur. Keeping hundreds of millions of workers occupied means having labor intensive industries, just at a time when IT is leading the global economy into the future. In order to survive as a one party nation, China has hit a brick wall in terms of it’s investment requirements - labor intensive, old fashioned and increasingly outmoded. India has no such restrictions, and it’s IT industry - despite it’s democratic position - is world class. If China hits that one party labor intensive “keep ‘em busy to stop them rebelling” position, then it will become increasingly burdened, and India can and will catch up.
A Democratic China ? The Signs Are There…
As to China throwing off the one party system, well thats interesting. The National Reform & Development Commission - the communist parties think tank - has a team looking at the democratization of China. Plus - as an observation - why are some of China’s corrupt officials embezzelling huge amounts of money - in excess of USD 1 billion in some cases ? The only reason you would need such a gigantic sum is to want to position yourself as a future ‘first family’ - if China became democratic, and need to have that sort of capital to be the powers behind the throne. “Managed democracy” - where the communist party transmogrifies into power being held by an elite group of families - is more likely. 20-30 years ? If that is the only way China can maintain it’s growth, it has to democratize. If not, India will catch up.
The Power of the Population
China’s population is aging - in fact it’s the fastest growing population of elderly in any major country. Retirees will double by 2015 to 200 million. That, plus the effect of the one child policy, is starting to affect China’s demographics, as their workforce begins to shrink and age. An evolution of cheap young workers into pension bearing citizens will slow the Chinese economy down and make it’s labor force more expensive.
India doesn’t have that problem. It has plenty of cheap, young labor. It’s problem however is rather different - with 65% of Indians living in rural villages - it’s getting them empowered and into the workforce that is the major issue. Investments into education, and empowering that latent population is key. Whether or not India can pull that off is a debatable point. But with the economists and government all recognising the truth behind a sustainable Indian growth demanding it’s underused rural population is freed from their shackles of poverty, India is certainly aware of the issue.
Can India overtake China ? It could happen. And the political platform and population demographics are the two major drivers that can make this so.
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March 21st, 2007 at 8:53 pm
Chris,
Nice post.
In this context, you may find this interesting:
http://global-themes.com/googly-cricket-india-china/
March 22nd, 2007 at 1:53 pm
Thats a great site Shantanu, and also as you say a fascinating piece with more detail on why the rise of India - and it’s potential to overtake China - is rather more than just pie in the sky. I’ve taken the liberty of cutting and pasting it here for the sake of continuity - but guys please do also have a look at Shantanu site at http://global-themes.com, there’s a lot of neat comment there as well concerning globalization and India’s / China’s / US / Europe’s role in this.
This from “Tosh” - and I love the cricket analogies !
NB: “Googly” : defined as a delivery by a right arm spin bowler which to a right hand batsman appears as if it will spin from leg to off, however, spins in the opposite direction.
“…Had India played a fair game of cricket, it would have waited (at least until the Beijing Olympics) before foisting a second, near-alchemical reincarnation of Asia’s rise on an unsuspecting world.
For India has, unexpectedly, joined China in attaining near double-digit economic growth rates. It has done so in violation of that mantra of MBA programmes – that foreign direct investment (FDI) is the recipe for growth in a developing country.
…Few guesses are needed, though, to explain India’s googlies. Unlike China, it did not have to learn about capitalism, or conjure up its accompanying soft infrastructure. Quite the contrary. In IT, for example, it was India – not the US – that invented the offshore business model (one reason for the stratospheric American market valuations of India’s software giants).
Subtler reasons for India’s sudden rise may lie in the latest Forbes rich list. Indian billionaires now control more money than their counterparts in China and even Japan.They were careful to shield India (and their emerging empires) from the disruptive forces of FDI until they were ready. Now, armed with their own global competencies and scale (including those acquired overseas), they are.
…Indeed, what India Inc. has pioneered is a new business paradigm – of combining Indian comparative advantage with the core competency of its corporations, to haul the country up by its bootstraps.
Globalising India’s next phase will provide new opportunities for Europe’s policymakers, as attention shifts to the 800 million Indians living below the Davos horizon, facing 19th-century challenges in a country with many facets of the 21st.
…Though a late entrant to Game India, Europe has distinct advantages over the US in all these areas. In addition, Europe – unlike the US – might work with India to cushion global risks from an overheated or imploding China. In many ways, China increasingly resembles southeast Asia of the late 1990s: an FDI-driven exporting super-miracle run by an authoritarian regime, with real dangers of internal disconnects – of market from industry, leaders from the led, village from city, and imagination from reality.
To me, China’s civilisational élan vitale has one focus: the 2008 Olympics, which its leadership is determined to see through as a Great Power rite of passage. But once the glitter of the Olympics has faded, rising popular expectations, a trillion-dollar overhang of bad debts within the banking system and a grossly undervalued currency may prove a lethal cocktail.
If so, this would be the classic morning after, following a two-decade-long fling between Western finance and know-how on the one side, and Chinese industriousness and hospitality on the other.
The Olympics have in the past been an ominous precedent for non-democratic regimes. Note Berlin (1936) and Moscow (1980).
Come 2009-10, India’s supercharged economy, warts and boils still very much in the open, may well become the toast of Europe, and the world beyond – provided that the Indians, of course, continue to play their own style of cricket.�
(** The article originally appears in the March-April 2007 issue of E!Sharp (pg 41) under the title, “PERSPECTIVES�, By Ashutosh Sheshabalaya. E!Sharp is published by the EU thinktank, “The Centre�).
April 6th, 2007 at 12:50 pm
Chris,
Thanks for the link back…and another snippet that I picked up y’day which you and your readers may find fascinating:
In Maharashtra alone, wealthy families and HNWs hold assets of $60bn - almost 10x the current FDI in India!
April 15th, 2007 at 3:19 am
I have a problem with the term “managed democracy”. This concept of stating that politicians and party officials embezzle” large sums of money in order to create funds and a platform to “democratize” China is very dangerous and somewhat simplistic in its view not taking into account emotional distress within the party against such cleptocrats. What it implies is getting a number of wealthy families to run the country. That would ultimately imply large businesses to run the country and steer elections. Not only is this something totally out of line with the party doctrine but is from an economic perspective highly undesirable.
China has chosen for a capitalist economy but tries to keep socialist principles alive. A multiparty state, especially funded by corrupt ex-officials, would create a situation similar to the rule under Generalissimo Chang Kai Tsjek. That system was the best PR mechnism the communist party could have wished for. It allowed for the party to gain popularity amongst the have-nots the system had created and ultimately helped it to take control of China.
Corrupt officials have two choices: get out of China (like their Russian counterparts) or go to jail/face the firing squad. The Chinese government is not the kind of government that would allow people, who have proven to have no sense of good governance, a chance to rule behind the scenes. And rest assured: The Chinese government will step up the efforts to hunt corrupt officials down wherever they choose to reside.
If we look at what is happening in the US at the moment then that would come in close range of this concept and it is certainly not in the interest of China to follow such a course. Compare it to what happened in Russia after the big grabbing of State funds and asets that took place under Jeltsin. The question is if the country is ever going to recover from that period. Making sure the moguls of these years are dienied a round two is essential. It is not without reason that Berezovsky is living in London as he would likely use his illegal acquired money to set up such a form of government. As a matter of fact Berezovsky is actively trying to get in power and is indeed willing to use his ill acquired funds to do just that under the pretext that Putin is undemocratic. Democratic rule in itself is a very difficult concept and variations in the democratic mantra often end up being the opposite of what it generally is supposed to stand for: a majority dictatorship becoming a minority dicatorship.
Democracies in general, especially two party systems end up in a deadlock where big capital donates generous party contributions and is being rewarded with favorable policies and contracts, makes sure that the corporate tax burden is greatly diminished, pushes for the abolishment of social policies (unless they can benefit from the contracts it creates) and will make sure to externalize all costs on society. In the end it is the common man paying the bills fora small elite’s externalizing behavior. The concept has been proven over and over again as completely unsustainable and results in tragedy.
The other way of creating wealth also holds. Populist leaders are being elected, create a nomenclatura and start amassing wealth in order to stay in power and allow for another round of wealth extraction. A managed democracy is probably more dictatorship that the one party state offers.
In its ultimate form the managed democracy would be purely run by businesses and would model society and government with maximization of profits as goal, ethics being irrelevant. That was basically the state created my Benito Mussolini: The Fascist State. That was what brought the nazis to win the elections and abolish democracy alltogether: The generous support of rich family (businesses) who afterwards indeed did a lot of managing behind the scenes.
China’s managed version of democratic rule is already taking shape. Grassroots elections of officials on the village and county level and in the future there is no reason to believe that under the rule of the party the most important issues could be dealt with through a referendum or an improved version of the NPC that would allow more public debate before casting the vote on new legislation. The are possibilities to have your say without a two party western style democratic system. Having a lot of parties is then heralded as the ultimate choice. However creating a government with a tiny majority and powerfull opposition is a sure fire way to delay critical decisions indefenitely. It sometimes work in small countries but something on the scale of China requires a strong government.
India, as was pointed out earlier has had its fair share of families living the mogul lifestyle, funding politicians and being rewarded with subsidies, lucrative contracts, non-tariff barriers to protect their inefficient industries etc. That comes close to a managed democracy and it has not created sustainable growth but unfortunately a lot of misery and backwardness. Although this might contradict with the fact that curent economic figures in India are so rosy one needs to take notice that a lot of the growth is generated by relatively new industries that were liberalized without having to deal with the well established families that have been funding either BJP or congressparty (or both)
April 15th, 2007 at 10:16 am
Re-reading my message there is one item that I have not explained on the Russia version of the managed democracy which is not so much a number of families but Putin who weakened the democratic institutions., controls the media and offers elections that are cosmetic at best. Here would be an example of ‘Chris version of the managed democracy clashing with Putin’s managed/cosmetic democracy.